For 27 months running, from September 2016 to November 2018, consumer food inflation in India has been ruling below general inflation. In five of these 27 months — May, June and July 2017, and then October and November 2018 — the annual increase in the official consumer food price index has been negative, meaning Indians are paying less for vegetables, pulses, sugar or eggs now than a year ago.
The significance of this is better understood if one looks at the previous 27-month period, from June 2014 to August 2016, when it was quite the opposite: In 20 of those 27 months, the year-on-year inflation in food was more than that for the overall consumer price index (CPI). If one went back still further and took the period from March 2012 to May 2014, the story was the same, with food inflation topping general CPI inflation in 25 of these 27 months.
Simply put, the last two years or more — especially post-demonetisation in November 2016 — have been extraordinary for food inflation. It has remained not only below 4% in all but three months (November 2017-January 2018), but also consistently lower than overall consumer inflation. The latter gap has, moreover, widened since the start of this calendar year (see chart). The latest November consumer food inflation number, at minus 2.61%, is almost 5 percentage points less than the corresponding general CPI increase of 2.33%.
This kind of sustained low food inflation or even deflation is, perhaps, unprecedented in India’s history. Its implications are both economic and political.
The economic impact is reflected, among other things, in the Reserve Bank of India repeatedly getting its inflation forecasts off the mark. For the July-September 2018 quarter, the RBI’s monetary policy committee had projected general CPI inflation to average 4%, whereas the actual figure was 3.85%. The October rate of 3.38%, by its own admission, “turned out to be unexpectedly low”. And with the latest November inflation print at 2.33%, the debate is no longer on whether the RBI will cut interest rates, but when and by how much. This “over-achievement” in meeting its inflation target/forecasts is partly on account of oil — brent crude collapsing to $ 60-61 per barrel, from the early-October highs of $84-85. But it is also equally due to food and beverages, which have a combined weight of 45.86% in the CPI.
The political fallout of low/negative food inflation is agrarian unrest. While cheap food may be good for consumers, it also translates into low produce prices for farmers. The apparent rural backlash against the ruling BJP began roughly after May 2017, when the rabi crop planted just after demonetisation was being marketed. Both May-July 2017 and October-November 2018 — which preceded the recent Assembly elections, in which the party tasted defeat in Madhya Pradesh, Rajasthan and Chhattisgarh — have been periods of food inflation sliding into negative territory.
It begs the question: What explains such extended and historically low levels of food inflation? It wasn’t, after all, too long ago, when these rates were at double-digits for 22 consecutive months, from April 2012 to January 2014. At that time, it was consumer anger that did the Congress-led UPA in. There was very little that the RBI, too, could do then to control prices of onions or tur dal. Inflation targets were invariably overshot.
Demand & supply
One reason for food inflation declining markedly in the recent period is supply-side gluts, resulting from bumper domestic harvests as well as low global prices — which have rendered the country’s agricultural exports uncompetitive, even while increasing vulnerability to imports. The effects of this have been magnified by the current government’s supply-side management — imposition of export and stockholding restrictions on farm goods, alongside allowing duty-free imports — to complement the RBI’s inflation targeting policy. Such actions were seen particularly during the first three years of its term: In 2016-17, India imported a record 6.61 million tonnes (mt) of pulses, despite domestic output soaring from 16.35 mt to an all-time-high of 23.13 mt. Given the sheer supply overhang, it’s not surprising that the wholesale price index for pulses in November 2018 is below its same-month level of not only 2017, but even 2016 and 2015.
However, supply may not be the sole factor.
The demand side might lend itself to an even more interesting line of enquiry. Is there a slowdown in income growth that is also affecting consumption demand for foods? The fact that retail prices of milk — a product with income elasticity of demand exceeding one; a 1% rise in income leads to a more than 1% increase in consumption — have gone up by hardly Rs 4 per litre or 10-11% in the last four years seems to suggests so. A clearer picture can emerge only after results of the National Sample Survey Office’s next comprehensive household consumer expenditure survey — the last one was conducted for 2011-12 — come out.
Equally important is the liquidity dimension. Farm commodity trading in India has traditionally been cash-based. There is anecdotal evidence to show that demonetisation, in combination with the goods and services tax, has made traders less inclined to buying and stocking up produce during the harvesting season, with a view to profiting from price increases. Daily limits on cash transactions and the fear of being “watched” by revenue authorities are seen to have contributed to a general lack of “sentiment” in mandis. While cash may have returned to the system, it isn’t circulating as freely as before. All this has, of course, mainly hit farmers who are today selling in a market devoid of liquidity and buyer confidence.
That probably is the real explanation for farm prices now being more prone to falling than rising — and food inflation not biting consumers the way it used to.